Appointment of Cost Auditor under the Companies Act, 2013

Section 148 of the Companies Act, 2013 empowers the Central Government to specify audit of items of cost in respect of certain companies.

Section 148(2) of the Companies Act, 2013, reads as under-

“(2) If the Central Government is of the opinion, that it is necessary to do so, it may, by order, direct that the audit of cost records of class of companies, which are covered under sub-section (1) and which have a net worth of such amount as may be prescribed or a turnover of such amount as may be prescribed, shall be conducted in the manner specified in that order.”

Applicability of cost records

Rule 3 of the Companies (Cost Records and Audit) Rules, 2014 specifies certain class of companies, including foreign companies defined in clause (42) of section 2 of the Companies Act, 2013, engaged in the production of goods or providing services specified in the table mentioned therein, having an overall turnover from all its products and services of Rs 35 crore or more during the immediately preceding financial year, who shall include cost records for such products or services in their books of accounts. The specified products or services are grouped in Item A (Regulated sector) and Item B (Non regulated sector) in the table mentioned therein alongwith Customs Tariff Act Heading, wherever applicable.

Applicability of cost audit

• As per rule 4(1) of the Companies (Cost Records and Audit) Rules, 2014, every company specified in item (A) of rule 3 of the Companies (Cost Records and Audit) Rules, 2014 shall get its cost records audited, if the overall annual turnover of the company from all its products and services during the immediately preceding financial year is rupees fifty crore or more and the aggregate turnover of the individual product or products or service or services for which cost records are required to be maintained under rule 3 is rupees twenty five crore or more.

• As per rule 4(2) of the Companies (Cost Records and Audit) Rules, 2014, every company specified in item (B) of rule 3 of the Companies (Cost Records and Audit) Rules, 2014 shall get its cost records audited, if the overall annual turnover of the company from all its products and services during the immediately preceding financial year is rupees one hundred crore or more and the aggregate turnover of the individual product or products or service or services for which cost records are required to be maintained under rule 3 is rupees thirty five crore or more.

Non applicability of Cost Audit

• Sl No 33 of Item B of the table specified in Rule 3 of the Companies (Cost Records and Audit) Rules, 2014 regarding production, import and supply or trading of certain medical devices shall not apply to foreign companies having only liaison offices. [First proviso to Rule 3 of the Companies (Cost Records and Audit) Rules, 2014]
• Companies which are classified as a micro enterprise or a small enterprise including as per the turnover criteria under sub-section (9) of section 7 of the Micro, Small and Medium Enterprises Development Act, 2006. [Second Proviso to Rule 3 of the Companies (Cost Records and Audit) Rules, 2014]
• Companies whose revenue from exports, in foreign exchange, exceeds seventy five per cent of its total revenue. [Sub-rule 3 of rule 4 the Companies (Cost Records and Audit) Rules, 2014)
• Companies which is operating from a special economic zone. (Sub-rule 3 of of Rule 4 the Companies (Cost Records and Audit) Rules, 2014]
• Companies which is engaged in generation of electricity for captive consumption through Captive Generating Plant. For this purpose, the term “Captive Generating Plant” shall have the same meaning as assigned in rule 3 of the Electricity Rules, 2005. [Sub-rule 3 of Rule 4 of the Companies (Cost Records and Audit) Rules, 2014]

Time limit for appointment of Cost Auditor

As per rule 6(1) of the Companies (Cost Records and Audit) Rules, 2014, every company, to which, audit of cost record is applicable, shall within one hundred and eighty days of the commencement of every financial year, appoint a cost auditor. As per rule 6(3) of the Companies (Cost Records and Audit) Rules, 2014, every cost auditor shall continue in such capacity till the expiry of one hundred and eighty days from the closure of the financial year or till he submits the cost audit report, for the financial year for which he has been appointed.

Who Shall Conduct Cost Audit

As per the amended section 148(3) of the Companies Act, 2013, the cost audit shall be conducted by a cost accountant who shall be appointed by the Board on such remuneration as may be determined by the members in such manner as may be prescribed in Rule 14 of the Companies (Audit and Auditors) Rules, 2014. Therefore, as per the amended provision, a cost accountant need not be in practice to conduct the cost audit. However, no person appointed u/s 139 of the Companies Act, 2013 as an auditor of the company shall be appointed for conducting the audit of cost records.

Relevant Amendments

In sub-section (3) of section 148 of the Companies Act, 2013: –

• The words “cost accountant” substituted for the words ” cost accountant in practice” by the Companies (Amendment) Act, 2017 vide Notification No. S.O. 630(E) dated 09/02/2018 w.e.f. 09-02-2018.

In Rule 14 of the Companies (Audit and Auditors) Rules, 2014: –

• The words “cost accountant” substituted for the words ” who is a cost accountant in practice” by the Companies (Audit and Auditors) Second Amendment Rules, 2018 vide Notification No. G.S.R. 432(E) dated 07/05/2018 w.e.f. 07-05-2018.

Remuneration of the Cost Auditor

In case a company is required to constitute an audit committee, then the audit committee shall recommend the remuneration of the cost auditor and the Board will approve it. In case of other companies, the Board shall fix the remuneration. In both the cases, the remuneration of the cost auditor shall have to be ratified by the shareholders of the company subsequently.

Rule 14 of the Companies (Audit and Auditors) Rules, 2014 pertaining to remuneration of the cost auditor reads as below-

“For the purpose of sub-section (3) of section 148,-

(a) in the case of companies which are required to constitute an audit committee-

i) the Board shall appoint an individual, who is a cost accountant, or a firm of cost accountants in practice, as cost auditor on the recommendations of the Audit committee, which shall also recommend remuneration for such cost auditor;

ii) the remuneration recommended by the Audit Committee under (i) shall be considered and approved by the Board of Directors and ratified subsequently by the shareholders;

(b) in the case of other companies which are not required to constitute an audit committee, the Board shall appoint an individual who is a cost accountant or a firm of cost accountants in practice as cost auditor and the remuneration of such cost auditor shall be ratified by shareholders subsequently.”

Cost Audit Report

Every cost auditor, who conducts an audit of the cost records of a company, shall submit the cost audit report along with his or its reservations or qualifications or observations or suggestions, if any, in Form CRA-3. Every cost auditor shall forward his duly signed report to the Board of Directors of the company within a period of one hundred and eighty days from the closure of the financial year to which the report relates and the Board of Directors shall consider and examine such report, particularly any reservation or qualification contained therein.

The cost statements, including other statements to be annexed to the cost audit report, shall be approved by the Board of Directors before they are signed on behalf of the Board by any of the director authorised by the Board, for submission to the cost auditor to report thereon. [Rule 6(3B) of the Companies (Cost Records and Audit) Rules, 2014]

Every company, if cost audit is applicable shall, within a period of thirty days from the date of receipt of a copy of the cost audit report, furnish the Central Government with such report alongwith full information and explanation on every reservation or qualification contained therein, in Form CRA-4 in Extensible Business Reporting Language format in the manner as specified in the Companies (Filing of Documents and Forms in Extensible Business Reporting Language) Rules, 2015 alongwith fees specified in the Companies (Registration Offices and Fees) Rules, 2014. [Rule 6 of the Companies (Cost Records and Audit) Rules, 2014]

Companies which have got extension of time of holding Annual General Meeting under section 96(1) of the Companies Act, 2013, may file form CRA-4 within resultant extended period of filing financial statements under section 137 of the Companies Act, 2013. [First proviso to sub-rule 6 of rule 6 of the Companies (Cost Records and Audit) Rules, 2014].

Procedure for appointment of cost auditor

Also Read Board Resolution for appointment of Cost Auditor

Also Read General Meeting Resolution for Approval of Remuneration to Cost Auditor